Is this long-distance commute worth the expense?

I am more than willing to keep on working. I am well paid for it, even though the commuting is a strain. I can’t find a job on the island that matches my present salary, so the commute is just a fact of my life.

A well-paying job away from home has put a couple we’ll call Fred, 62, and Marcia, 57, in a bind.

To earn $7,670 a month after tax, twice what a job he had a few years ago paid, he lives in an apartment near his Vancouver office during the week. Weekends, he retreats to his home on Vancouver Island. By circumstance, he has become a transient, commuting from his job running a marketing company five days a week to spending weekends with Marcia. She joins him in Vancouver occasionally.

Long-distance commuting is not rare these days. But Fred wants to plan a retirement without long ferry rides. His commute to his Vancouver office runs up a monthly bill of $550 just for ferry tickets for trips with his car. The Vancouver apartment, for which he pays $890 in rent, plus parking costs and hundreds of dollars a month in incidentals raise the bill for living in Vancouver to $2,000 a month.

Yet, Fred comes out well ahead even with these costs.

Family Finance asked Lenore Davis, a senior partner in the financial planning firm Dixon, Davis & Co. in Victoria, to work with Marcia and Fred. The problem, she says, boils down to the question of what continuing to work in Vancouver and maintaining two homes is worth.

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“I am more than willing to keep on working,” Fred says. “I am well paid for it, even though the commuting is a strain. I can’t find a job on the island that matches my present salary, so the commute is just a fact of my life.”

Fred and Marcia are not financially ready to retire. They have $327,500 in financial assets, not enough to support a retirement that would allow him to maintain his present way of life. Those savings would generate just $819 a month at 3% over the rate of inflation. The couple would have to tap their savings and erode their capital.

But if Fred works eight years in Vancouver to age 70 at his present salary, allowing capital to grow and deferring the time he starts to take money from his RRSP and begins Canada Pension Plan benefits, he and Marcia could retire secure in the knowledge their resources would be sufficient to maintain their way of life. Fred would gain a 42% boost in benefits by delaying the start of CPP benefits to age 70.

They can reduce their cost of maintaining their Island home, Ms. Davis says. British Columbia allows people 50 and over to defer property taxes until the sale of the property or deemed disposition at death. This step would save them $400 a month, or $4,800 a year, in tax. Then, when their present mortgage is up for renewal in 2013, they can switch to a line of credit that does not amortize their principal amount borrowed. This plan, which postpones repayment of principal, turns most of the $1,690 they pay each month on the mortgage into cash flow for current use.

Their present $300,000 mortgage, which costs $20,280 a year, could shift to a $300,000 line of credit at 3.5% that costs $10,500 a year. That would save them $9,780 a year.

Add the property tax postponement, $4,800, and their total real estate savings would be $14,580 a year, or $1,215 per month. The line of credit would be eliminated by a $300,000 or more inheritance they expect within a few years.

Retirement income

Fred has $82,150 in unused RRSP contribution room. He generates another $22,500 a year in contribution room at his salary level in his present job. He can borrow to make maximum contributions to the RRSP while his income is in B.C.’s over 38.3% tax bracket. The top rate, where Fred would start, is 43.7%.

If he puts $50,000 into his RRSP, he could save $21,850 on his current tax bill. He could use $20,000 in cash he has in a bank account and borrow at a prescribed rate of 1% the $30,000 balance from Marcia, who recently received $42,500 from the sale of her business. The tax refund can be used to repay most of the loan from Marcia. He can pay the balance, $8,150, out of monthly savings. The loan would be gone in less than 16 months at his present rate of savings.

If Fred makes the $50,000 RRSP contribution in February 2013, his balance would rise to $235,000. Added to Marcia’s $80,000 balance, they would have $315,000. If those balances grow at 3% a year after inflation, in 2020, at his age 70, Fred and Marcia would have approximately $400,000 in RRSPs. If paid out at an average 3% a year, the registered funds would generate $1,000 a month before tax.

That income, plus $1,207 a month in Fred’s enhanced CPP payments starting when he is 70, plus his $545 Old Age Security benefits starting next year and Marcia’s OAS benefit of $545 a month starting in 2020, would generate retirement income of nearly $3,300 a month in 2012 dollars. Their pre-tax annual income would be about $39,600. If taxed at an average 10% rate, they would have $35,640 a year, or $2,970 a month, to spend.

Downsizing their house to capture $250,000 of equity after costs could add $7,500 a year at 3% after inflation, pushing annual pre-tax income to $47,100, or $42,390 after 10% average tax. That’s $3,533 a month, enough to pay current bills less Vancouver rent and commuting costs, taxes and most savings. The line of credit should be eliminated by their inheritance.

In the end, commuting is clearly worthwhile in financial terms. Indeed, it is the only way to do it in the absence of a job on the island with income equivalent to his present salary. The status quo, for now, can’t change.

“This plan to ease into retirement in eight years has costs and risks,” Ms. Davis says. “It turns amortizing mortgage debt into perpetual line-of-credit debt and counts on the demise of a parent. However, the growth of their retirement savings shows that eight more years of work is worthwhile.”

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By clicking "Create Account", I hearby grant permission to Postmedia to use my account information to create my account.

I also accept and agree to be bound by Postmedia's Terms and Conditions with respect to my use of the Site and I have read and understand Postmedia's Privacy Statement. I consent to the collection, use, maintenance, and disclosure of my information in accordance with the Postmedia's Privacy Policy.